LAYER1 is an index of alternative Layer 1 protocols. The product passed the final Decision Gate in IIP-135 with a 100% vote. Since that time, MBPs have emerged as an attractive alternative technology to TokenSets for simple sets such as LAYER1. MBPs have multiple major advantages; most notably rebalancing has negligible gas costs and can access much deeper liquidity. Moving to MBPs would also help Index Coop achieve greater technical independence, a goal which Set strongly supports. The Balancer leadership is also strongly interested in partnering specifically with Index Coop to co-develop index products on their MBP platform.
Proposal
Managed Balancer Pools are a new pool type from Balancer designed to “provide a framework for fund managers”. They provide features not available in conventional Balancer liquidity pools such as the ability to charge an AUM fee.
The major benefit of MBPs is that rebalancing is done by a permissionless market auction so the gas costs and manual effort are externalized. As has been extensively discussed through the product profitability initiative, gas costs for rebalancing on mainnet are extraordinarily expensive to the point of making rebalancing economically infeasible (Index Coop product profit dashboard).
Pros and Cons of building simple sets such as LAYER1 on MBP instead of TokenSets are as follows.
Pros
Gas costs and effort for rebalancing are negligible since rebalancing is externalized to the market via auction.
Rebalancing can access much deeper CEX and L2 liquidity. The deeper liquidity reduces the asset decay in our products and also opens up compositions to otherwise ineligible tokens.
Swap fees (not available on TokenSets) provide a new source of potential income for holders and managers. Note that Balancer takes a fixed 50% protocol charge on the swap fee income.
Much lower gas costs for minting and redeeming, which reduces the acquisition costs for our customers.
Reduced need for seed liquidity. The harmonic liquidity philosophy shows that required liquidity for a product is based on how much it costs to mint/redeem a product. In MBPs, the equivalent of mint/redeem is a Join/Exit.
More types of ERC20s can be put into an MBP index such as LPs, derivatives, and options.
The ability for the manager to add and remove assets from the set which could potentially unlock new forms of productivity.
Impermanent loss only when trading is activated within the pool
Testing the MBP protocol before using it for other products.
Potential for a strategic and operational relationship with Balancer for product co-development.
Cons
The MBPs are not battle-tested and there are unknown smart contract, operational, and marketing risks.
The MBPs have many new options for customization that on the one hand create new design possibilities but will also require more design effort.
Impermanent Loss (applicable only when trading within the set is active) is according to the Weighted Math formula which potentially creates greater IL risk.
Given the novelty of the protocol, the products will potentially be considered lower quality collateral on lending markets such as Aave.
The fee options for a MBP are different from TokenSets. Accordingly, the new fee structure would be:
Fee
New
Prev
Description
AUM Fee
2.95%
2.95%
Annual fee based on AUM (or NAV). aka Streaming Fee in TokenSets
Swap Fee
0.1%
n/a
Fee for swaps within the set
Protocol Fee
50%
n/a
Portion of the swap fee given to Balancer
Management Fee
100%
n/a
Portion of the remaining swap fee (post-Protocol fee) given to the manager
Mint/Redeem Fee
n/a
1%
Fee for mint/redeem
The Swap Fee provides a source of income for rebalancing but disincentivizes auction bidders and so pushes the cost onto asset decay. Hence, we are proposing to pilot with a small Swap Fee of 0.1%. The overall fee split would be unchanged from IIP-135.
If LAYER1 is successful on MBP in terms of AUM at month 6, gross profit margin, user experience, and no severe technical issues then we will consider launching future simple sets on MBP.
Managed Balancer Pools are an incredibly exciting opportunity which will allow us to create entirely new types of products, and will make some of our pipeline more feasible from a liquidity perspective. It will also help us solve some of the challenges like AUM Decay and will automate rebalances. Thanks for getting this going @JosephKnecht! Also special thanks to Jared from Balancer @Gooseisloose for working with us and getting our questions answered. Let’s ship some products!
Jared here from Balancer Biz Dev. We are very excited to embark on this journey with Index Coop! We at Balancer have been hard at work designing and building infrastructure to facilitate the needs of users just like you. It would be an incredible opportunity to have you on the ground floor with us building ManagedPools to meet the complex needs of the growing DeFi-native index fund space. This is a core area of development for our community that requires a strong use case to drive success, thus our attention and commitment to working with JK, Anthony and Andrew thus far. Happy to answer questions and provide more color where necessary! Look forward to connecting with more of the team!
Hey everyone, I’m a long time community contributor at Balancer and also a Day 1 INDEX farmer from back in the day
It has always been my belief that Balancer’s biggest market opportunity is index products. Our technology is so flexible that any kind of index can be supported, especially now that we are starting to direct serious engineering resources towards managed pools which I believe are the basis for the most powerful index technology available today. Putting together INDEX’s expertise at index design, curation, and management with Balancer’s technology under the hood will take both of our organizations to the next level.
I’ll stop before I overdose on hopium but this is something I’ve wanted to see for a long time. Huge credit to Jared and everyone on the INDEX side for putting in the work to get a proposal like this off the ground. I’ll be cheering it on!
@Gooseisloose@solarcurve Welcome to the coop! Very excited to share with the community some of the discussions we have been having.
“Application” (Product) specific platforms for optimal product performance is indeed a huge opportunity and has the potential to unlock new and exciting products in the future. Very much looking forward to working closely with you. Thanks for everything you have done so far to get us here.
Hi All, another Balancer community member here. I just wanted to stop by to say I’m super excited to see this proposal. Native Defi index products are something I’ve been interested in for some time now, so it is great to see a protocol considering using this powerful new product toolset. I’m really looking forward to what could happen here.
Hey familia, I’m Alan from Balancer Labs. I’ve been waiting for this type of synergy since I joined Balancer. DPI was the first crypto index product that I bought, and since then, I’ve been an enthusiastic fan of what Index Coop is doing for defi. Balancer is creating one of the most groundbreaking technology for portfolio managing, and with the launch of managed pools, we can take Index Coop to the next level.
I can’t wait to start collaborating officially with you. LFG
Hi everyone! This is Kia from Balancer.
It’s great to see this proposal. Just wanted to drop-in and say that we’re committed and ready to work with you guys on this.
We’re strongly confident in the capabilities of the managed pools for index products and can’t think of a better partner to work on an index with than you guys.
The Managed Pools have the ability to significantly reduce the operational overhead that you guys might otherwise experience with the mechanics of managing an index. The manager can simply update the index by changing the list of assets in the index and their percentages and let the market and arbitrageurs do the work of rebalancing. This is uniquely possible because managed pools are an AMM pool on top of the Balancer Vault and connected to the network of liquidity that is used by traders. The Balancer Pool Token (BPT) would be the index as it represents a share of the assets in the pool.
We’re around the forum if you anyone has any questions. Really looking forward to working more closely with the Index Coop community. Cheers!
Hey @JosephKnecht, an IIP number (147) has been assigned.
GovRep @asira will run this proposal through the IIP process as per the guidelines outlined here. Unless you have any objections, this proposal will be queued to start on Monday 11th April 2022, @ 1800UTC.
This is great.
First of all excited for the COOP to look beyond Sets. Not because Sets are bad tech, but simply because this shows the COOP will be open to experimentation and collaboration outside of its founding team, something that is hugely valuable imo!
Other than that, as a early COOP member and contributor and a recent Balancer contributor, obviously like this combo in particular. I even remember when Balancer launched that is was being introduced way back as a Set meets Uniswap by some blogs. Balancer is great for indexes and has come a long way with innovating.
Last but not least, I like the index idea itself as well, loads of new people will be looking for an easy L1 index token.
